Arbitration Clause Survives Death of the Named Arbitrator: SCI Rules

In ACC Limited v. Global Cements (MANU/SC/0489/2012), the Supreme Court considered the issue as to whether the arbitration clause would remain valid if the arbitrator named in the arbitration clause was no more. 

 

The arbitration clause in question stated:

"21. If any question or difference or dispute shall arise between the parties hereto or their representatives at any time in relation to or with respect to the meaning or effect of these presents or with respect to the rights and liabilities of the parties hereto then such question or dispute shall be referred either to Mr. N.A. Palkhivala or Mr. D.S. Seth, whose decision in the matter shall be final and binding on both the parties."

The agreement containing the arbitration clause was entered into in 1989. Arbitration was invoked in 2011. By that time, the arbitrators named in the arbitration clause had died. One of the parties had approached the High Court under Section 11. The High Court had held that since there was no indication that parties intended that arbitration clause would cease to be in existence. The court held that it was the policy of law to promote the efficacy of arbitration and therefore the efficacy of commercial arbitration must be preserved when dealings are based on agreement providing for recourse to arbitration when disputes arise. Consequently, the court appointed a retired Supreme Court judge as arbitrator.

A petition for Special Leave was filed in the Supreme Court challenging the order of the High Court. In the said petition, the petitioner argued that the arbitration clause specifically named two persons as arbitrators considering their connection with ACC Limited. Therefore, the argument was, on the death of the arbitrators, the arbitration clause ceased to exist.

Not convinced with the argument, the court held that an application would lie under Section 11 unless there is an agreement in the contract where parties specifically debar appointment of any other arbitrator in case it is not possible for the named arbitrator to so act. The court’s view was that the objective behind Sections 14 and 15 of the Act was to facilitate arbitration and therefore unless a specific agreement by parties, Sections 14 and 15 had to be interpreted “to promote efficacy of arbitration”.

The court opined that the phrase “at any time” expressed the intent of the parties that so long as any dispute arose between the parties, the same would be referred to arbitration. The court clarified:

“Objection can be raised by the parties only if there is a clear prohibition or debarment in resolving the question or dispute or difference between the parties in case of death of the named arbitrator or their non-availability, by a substitute arbitrator.”

Since the arbitration clause does not prohibit the parties from appointing a substitute arbitrator, the court refused to grant leave to appeal and dismiss the same. 

The position under the Old Act also appears to be similar [See, for instance, Prabhat General Agencies v. Union of India (1971) 1 SCC 79; Bijoy Kumar Swaika v. Shyamsundar Swaika AIR 1976 Cal 448; Amrik Singh Bhandari v. Uttam Singh Duggal AIR 1979 Del 81]. 

The judgement can be accessed from here. 

Arbitration Updates

In the past month or two there have been a few significant arbitration related developments, which are noted in this short post.

The Law of Arbitration Agreement in the absence of express choice of law

The English Court of Appeal has clarified the law on the determination of the law of the arbitration agreement in the absence of express choice by the parties. Comments on the judgement in Sulamérica Cia Nacional De Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ 638 can be accessed from Indian Corporate Law Blog (Part I & II), and Herbert Smith Arbitration News. We will do a detailed post on the case as a part of our Choice of Law series.

Supreme Court finds a Way to Circumvent IOC v. Raja Transport

Indian Oil Corporation v. Raja Transport is one of those decisions where the Supreme Court upheld the practice of Government agencies and Public Sector Enterprises of appointing its own senior personnel as arbitrators in dispute with their Contractors. The Supreme Court held that senior officers, usually heads of department or equivalent, of a government/statutory corporation/ public sector undertaking, not associated with the contract, are considered to be independent and impartial and are not barred from functioning as arbitrators merely because their employer is a party to the contract. The court also recommended discontinuance of the said practice considering the need for independence and impartiality of the arbitral process. In the recent case of Bipromasz Bipron Trading SA v. Bharat Electronics Limited MANU/SC/0478/2012, the Supreme Court held that “where there is material to create a reasonable apprehension that the person mentioned in the arbitration agreement as the arbitrator is not likely to act independently or impartially... then the Chief Justice or his designate may, after recording reasons for not following the agreed procedure of referring the dispute to the named arbitrator, appoint an independent arbitrator in accordance with Section 11(8) of the Act.” The arbitration clause provided for reference of disputes to the Chairman & Managing Director (CMD) of BEL or his nominee. The CMD appointed a General Manager as the arbitrator. Even so the court appointed a retired judge of the Madras High Court as arbitrator considering that (1) the CMD had directly dealt with the entire contract (2) the appointed arbitrator was a direct subordinate to the CMD (3) there was a reasonable apprehension of partiality as the CMD had dealt with the entire contract. Check out MJ Antony's article in the Business Standard on the case. The article also discusses a few past decisions on the topic.

The New Swiss Rules:

The Swiss Chambers of Commerce Association of Arbitration and Mediation and the Chambers of Basel, Bern, Geneva, Neuchâtel, Ticino, Vaud and Zurich have revised their Swiss Rules of International Arbitration in June 2012. The revised Rules can be downloaded from here (pdf). Comments on the revisions in the 2012 Rules can be found in Kluwer Arbitration Blog (here and here), Kluwer Mediation Blog and Transactional Notes blog.

When policies go under knife: The Haj Subsidy Decision

The recent incident of review of a policy by the SC was in an interim order of 7th May 2012 relating to Haj subsidy. This was a SLP between UoI and Rafique Shaikh Bikan. The fundamental issue was on the justifiability of the norms of registration of Private Tour Operators ferrying Haj Pilgrims. The SC decided to look into the entire Haj policy and in this leg of the proceeding was reviewing among others the Haj subsidy issue. The court observed the subsidy to be constitutional as it was already found so in an earlier judgment (Prafull Goradia v. UoI) but un-islamic and advised the government to progressively reduce and eliminate the subsidy within a period of ten years. Advised also that the amount so saved shall be employed for the upliftment of the community in education and other social development programmes. The decision has attracted opposing responses for obvious reasons.

I am not intending to enter into the issue visited ad nauseum, whether judiciary can review policy. Rather, I raise the point, how judiciary has reviewed policy in this judgment.

Use of history

The court have extensively used history to understand the reason behind sending goodwill team during Haj before finding it irrelevant as the basic reason no more stands. So also the way the selection to the team is done has less or nothing to do with the objective sought to be achieved.  When it came to the question of Haj subsidy, the court treated it ahistoric and decided that it is something to be discontinued without offering much of reason to hold so.

Haj subsidy was started in 1973 when the government had stopped a cheaper mode of transport that is by sea. To offset the extra cost that the pilgrims will have to bear the subsidy was instituted. That is the reason why even today, the reasonable travel cost is fixed and the over and above killing made by the opportunistic monopoly carrier (Air India) is subsidized by the government. On the lighter side, the subsidy will become irrelevant on the liquidation of Air India, which seems to be much prior to the decade limit kept by the judiciary. The history would have given the judiciary a perspective to understand the policy better.

Reason to discontinue the policy

Ask the court why the policy should be discontinued. Was it adopting a liberal secular stand? (See here for interesting read)  Seems not, nothing to suggest so. On the contrary court apologetically co-opted muslim theology and attempted to establish why should muslims themselves reject subsidy. Apart from this no reason come that easily, let alone legal reason, which anyway will not stand as already a bench of same strength in a writ proceeding had upheld the validity of the subsidy.

Limits of review

This judgment gives an opportunity to visit a frequented area within judicial review scholarship. What is the extent of judicial review to maintain a healthy balance? Though a one-size-fits-all formula is far from desirable, it could safely be said that judicial prescription of alternate policy is far from desirable. The court in the case doles out free advises as how to relocate the resources so saved from discontinuance of Haj subsidy. Were they compelled to be on the safe side to show that though 'we' are withdrawing a privilege 'we' make sure that the community remains to be the beneficiary in another way?

Do we call it justice, sensitivity or appeasement? In any case it does not fall within review.

Break Trust and Be Damned (Even in Government Contracts)

'No trust no more deal' is the commonsense rule of any business. Can the government follow the same line in commercial activities? It should, would be the definite commonsensical answer. The concomitant issue is, can the government act the same way a private person behaves in all aspects of commercial activities. Here the answer starts to branch. Its much more simple and easy for a private person to eliminate a non-trustworthy contract partner for future. One just does not deal with her/firm any more. It is a matter of choice, freedom to contract.

Government contract on the other hand is governed by multiple legal aspects; constitutional and statutory. Art. 298 vests the executive with power to enter into contract with the Union and the State Governments. There are various statutes that regulate the commercial activities of the state. Though contract formation essentially is a private law function the public character of one of the party to the contract, i.e., the government, adds certain extra responsibilities in the contract formation. The government in the deal making is expected to act reasonable, non-arbitrary, and fair so as not to attract the tentacles of Article 14. If that were the case when they break the deal what shall guide them is the question dealt in Patel Engineering v. Union of India, Decided on 11th of May, 2012.

For declining to honour a bid, which was initially been accepted, the Government blacklisted the petitioner for a year. Against which a writ was moved and the rejection of which resulted in the present SLP. The two major arguments of the petitioner were that the government lacked the power to blacklist as it is not incorporated in any of the conditions of tender and the punishment is disproportionate.

The court found the power to blacklist is located in the executive power of the state to carry on trade and business. To decline to do business due to legitimate reasons need not flow from any statute as long as state act rationally, non-arbitrarily and for legitimate purposes. The legitimate purpose is to be determined depending on the facts and circumstances.

The crucial question is of blacklisting. The bid document does not confer any power nor does the corresponding statute, the National Highway Authorities Act. The court still finds the power to blacklist with the state in the following way. " … in our opinion, the failure to mention blacklisting to be one of the probable actions that could be taken against the delinquent bidder does not, by itself, disable the 2nd respondent from blacklisting a delinquent bidder, if it is otherwise justified. Such power is inherent in every person legally capable of entering into contracts."

While concluding the judgment Justice Chelameswar even said that the punishment though was argued to be disproportionate cannot be held so. Rather it is setting an example for future delinquents who may behave the same way with the government. Making an example of the one in hand for the future rest has been the order of the old day that still continues.

Blacklisting by a private person has limited to nil consequence compared to blacklisting by governments. This raises certain issues. In commercial matters should the government be treated at par with private players? Should bigger consequence of being blacklisted by government prescribe a different course of action in a commercial activity? Answer to the first seems to be a conditional yes, as long as they act within the precincts of constitutional restrictions. For the second, though consequence in itself cannot prescribe course of action in commercial activities, the shadow of first answer will take care of the concern in the second.